Mr. Sriram Raghavan was a known engineer by profession who was looking to avail a loan against property as he had some properties in the city. He wanted to use the loan against property’s amount to set up his own engineering consultant business.
Although he had decided on a known online lender to apply for the LAP finance, he was still in a fix as he was unsure whether to opt for a Fixed Interest Rate or the floating. If you are also in a similar situation and is confused when it comes to deciding about variable vs fixed rate, this article will help you out.
When someone decides to avail a loan against property, he/she gets the option of choosing between the fixed and the variable interest rate.
Since a loan against property may have a longer tenor, it can affect your monthly income for long and that’s why you need to be prudent while making a decision.
Things to know when deciding fixed or floating is best
Get to Know the Fixed Interest Rate First
As the name suggests, your LAP interest rate will remain fixed and you will pay a fixed EMI for the loan during the entire tenor of the loan. Compared to the variable interest rate, the fixed interest rate may be 1-2% more.
However, the biggest benefit of deciding for the fixed interest rate is that you get a sense of clarity when it comes to knowing an amount that you will pay. Hence, when you are aware that you will pay a particular amount per month towards your loan, you can easily make arrangements in advance.
Nonetheless, things will not be the same as fixed interest rates are offered only during the initial years of the loan and will convert to variable one after some years. It is called reset and will depend on your lender’s terms and conditions.
Get to Know the Variable Interest Rate
The variable interest rate on a LAP means that the loan interest rate will depend on the market conditions. It will change every quarter as the changes made by the Reserve Bank of India. Any changes made by the RBI in the base rate will not reflect in your EMI as that won’t change but the tenor of the loan will. Lenders can also not charge any prepayment charges from borrowers under this arrangement.
When to Opt for the Fixed Interest Rate
If you don’t want any surprises in your EMI and if you want to keep paying a constant amount per month, especially if you have a fixed income, the fixed interest rate is ideal.
Also, opting for the fixed interest rate also helps you plan your monthly outlays as your tenor and the EMI for the loan are pre-decided.
When to Go for the Variable Interest Rate
If you know the market conditions well and can predict the notifications made by the RBI, you can easily go for the variable interest rate and avail the fluctuating benefits. You can also make some huge prepayments in this system and bring the interest rate down and keep off the risk associated with the future issues related to the repayments.
Anyone availing the loan against property, Housing Finance or other types facility should assess his/her needs, income and then decide to go for the fixed or the floating rates.
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